There is no denying that fund managers, fund promoters and their service providers are facing and will, over the next two years (at the very least), continue to face an onslaught of new legislation, both within the European Union (EU) as well as in other jurisdictions (Switzerland and the US, in particular).
As a knee-jerk reaction to past-scandals, high profile insolvencies and perceived abuses, European politicians and super-regulators continue to churn out new regulations, directives and guidance affecting operators in the funds industry.
Much has already been said about the EU Alternative Investment Fund Managers Directive (AIFMD) and how this will impact fund managers (in the Directive, AIFMs) with some link to Europe (be it because they are registered in an EU member state, because they manage an EU-based fund or merely because they wish to raise money from EU investors) and much more will be said once the European Commission reveals its much anticipated Level II implementing measures.
On the Ucits front, before the proverbial ink dried on the fourth reincarnation of this directive, work was already underway on Ucits V with a draft directive now expected to be published in April of this year. Two consultations later, the focus of Ucits V has been broadened to cover both the role of the Ucits depositary as well as Ucits managers’ remuneration arrangements; one can only speculate whether there will be any further additions. Ucits III (2001/108/EC) and the Eligible Assets Directive (2007/16/EC) gave the world the so called ‘Newcits’, structured Ucits as well as synthetic ETF Ucits each of which continue to attract hedge fund managers’ and regulators’ attention in equal measure. Following a policy orientation discussion paper published in July, 2011, the European Securities and Markets Authority (Esma) has now published a 77 page consultation paper setting out its proposed guidelines for these products, which, although not going as far as many had feared, probably marks a first step towards slowly reclaiming the Ucits brand as the retail product it was conceived to be.
Also related to the increasing calls (particularly from non-European regulators) for purging the brand or, at the very least, reinstating a distinction between complex and non-complex Ucits is the proposed redraft of the MiFID Directive (MiFID II). Besides aiming to exclude structured Ucits from the definition of non-complex instruments, MiFID II and its accompanying Regulation will undoubtedly impact investment services operators (both EU based and not) that fall outside the scope of AIFMD or the Ucits Directive as well as many of their service providers (there are other legislative initiatives in the offing applying to many of the others).
In the midst of this reboot of EU investment services regulation there is little doubt that certain business models or fund strategies will require revisiting or lose out on access to EU investors. Short of opting to follow George Soros into early retirement, opportunities abound for those fund managers, fund promoters and other operators that instead embrace the new regimes.
AIFMD will offer fund managers authorised as EU-AIFMs the right to market shares in their respective funds across the EU by means of the EU’s single passport on the strength of their authorisation in an EU Member State by following a tried and tested regulator-to-regulator notification procedure. Two proposed AIFMD related regulations, the European Venture Capital Fund Regulation and the European Social Entrepreneurship Fund Regulation also offer a similar opportunity for AIFMs. With private placement in the EU, the preferred route to date for fund managers, becoming even more burdensome under AIFMD (and potentially ended in 2019) and AIFMD’s requirements in the main still applying, the choice is obvious. Although early to tell, MiFID II and its new third country regime also looks set to offer a similar obvious choice to Non-EU investment firms: either set-up an EU entity or be required to set up a branch or, if eligible, navigate a registration with Esma.
Increasingly, non-EU fund managers are examining co-domiciliation (the setting up of an EU based fund manager and/or fund structure alongside their pre-existing structure) options or setting up an EU fund manager and either looking to delegate certain activity to the non-EU entity or limit the latter’s role to advisory, back office or research. Start-ups too are increasingly opting for an EU-based fund manager and, more often than not, an EU based fund in order to benefit from the single passport from July 2013 (EU-AIFMs marketing non-EU funds will need to wait until late 2015, if at all, for such passport). A self-managed EU fund (catered for under both AIFMD and Ucits) is also an option being actively considered.
In need of no introduction, the Ucits regime offers fund managers with ‘Ucits friendly’ strategies an investment product that is both easily marketed to (Ucits benefit from a similar passport) and well received by EU investors beside being craved by Asian and South American institutional investors. The Ucits manager passport (the right to manage Ucits funds in other EU member states) introduced by Ucits IV coupled with a simplified regime under AIFMD for fund managers authorised as Ucits managers, makes authorisation as a Ucits manager in an EU member state an interesting option both for fund managers managing only Ucits or looking to run parallel Ucits and alternative fund structures.
With EU legislation and Esma pushing for further harmonisation of EU member state implementing measures, choosing an EU domicile in which to set up shop is set to become less focused on which domicile offers the more favourable implementation or interpretation of the relevant regime and more on which offers the most savings. Although a necessary evil, compliance is costly which costs are borne in equal measure by investors and the fund manager. EU fund or fund manager domiciles promoting themselves as the ‘gold standard’ for their respective offering are seen as having equally expensive set-up and running costs that eat away at precious performance. It is here that Malta is clearly shining.
Over the past decade, Malta and its single regulator, the Malta Financial Services Authority (MFSA), have developed an enviable reputation for fund managers and funds. Offering efficiency, knowledgeable advisers and staff and the presence of major service providers that easily matches (and often surpasses) that available in “gold standard” domiciles but with set-up costs, running costs, key service provider fees and salaries each available at a fraction of the cost in other domiciles, Malta is and will continue to feature as the first option of all impartial domicile advisors. The harbour in Malta’s capital city, Valletta, has offered seafarers a sheltered place to lay anchor for hundreds of years, so it is only fitting that fund managers navigating the markets can lease prime premises with a view of Valletta’s majestic harbour at a realistic price.
Dr. David Borg-Carbott – Senior Associate in the Investment Services and Funds Group at Ganado & Associates, Advocates
Pubished in the HFM Week Special Report – Malta 2012